Don Cayo: Puny loonie weakens Canada’s economy

Don Cayo, Vancouver Sun columnist03.20.2014

Canadian dollar coins are displayed on a map of North America. A new report by the former chief economic analyst for Statistics Canada is contradicting conventional wisdom about the impact of loonie fluctuations on the economy.

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VANCOUVER — If you, like many British Columbians, make your living directly or indirectly from things harvested off of or out of the ground, you might like the look of today’s less-than-90-cent loonie.

After all, most of the cost of getting B.C.’s resource-based products to market are incurred in weak Canadian dollars, and most sales are in a stronger currency, usually the U.S. greenback. So if the price is set in Canadian dollars, foreign customers can afford to buy more, and you can undercut international competitors. It is better yet if payments are in U.S. dollars, as resource commodities usually are. Each buck a foreign customer pays will be worth — if not to you personally then to the company you work for — more than $1.10.

A lot of people, including many economists, assume similar benefits for Canadian manufacturers. After all, it sounds like a dream scenario when your costs are in low-value Canadian dollars and your export sales are in high-value foreign currencies. As well, when the loonie’s purchasing power is low, this drives up the cost of competing imports and gives Canadian-made goods a price advantage in the domestic market.

But, while a low dollar may be a genuine boon for resource-based industries, it probably isn’t for most manufacturers, even those who export a lot, according to Philip Cross, formerly StatsCan’s chief economic analyst and now a contract writer and researcher.

This is an era in which a lot of manufacturing has become a cross-border collaboration, with components sourced from a number of different countries. So the problem, Cross argues in a just-published paper from the Fraser Institute, is that the price of all these foreign inputs is driven up by a puny loonie.

Ditto for the zillions of imported things other businesses and individuals buy, which is bound to further dampen domestic demand and thus slow economic growth.

Worse, Canadians must pay prices set in U.S. dollars for not only the things we import, but also for some domestic products.

“Our lower exchange rate automatically raises the Canadian price for goods where an integrated North American market sets one price in U.S. dollars — mostly gasoline and some home heating fuels,” Cross writes. “In January 2014, for example, the price of gasoline in the U.S. edged up 0.1 per cent from January 2013, while in Canada it was up 4.6 per cent.”

As well, “The cost of fresh fruit and vegetables, mostly imported during our winter months, was up an average of 4.1 per cent in Canada from a year earlier, compared with a slight decline in the U.S.

“Other consumer goods where prices will rise include those that consume a significant amount of energy, such as air travel.”

He further predicted that businesses, which import 55 per cent of their machinery and equipment, will invest less in productivity enhancement when the loonie is weak. And private businesses, Crown corporations and governments all will pay more to service substantial amounts of debt they owe in non-Canadian currencies.

The bottom line, Cross argues, is that the overall costs to the Canadian economy of a weaker dollar outweigh the benefits.

This analysis — not to mention the recent performance of the loonie, which sank this week to a five-year low — is yet another rebuttal of the petro-dollar theory that was bandied about with abandon a year or two ago. It was the fear — often expressed as a certainty — that the health of Western Canada’s resource economy was driving up the value of the dollar at the expense of Central Canada’s manufacturing economy.

This analysis may also pass more ammunition to critics who think Stephen Poloz, the still-rookie governor of the Bank of Canada, is too dovish for the country’s good.

As recently as this week, Poloz was publicly musing about the prospect of weaker-than-expected growth forcing even lower interest rates than the almost-rock-bottom ones now in play. This, combined with his previous cautious/gloomy pronouncements, is credited as a major factor in dragging the dollar’s value down from parity with the greenback to the 89-cent range where it is today.

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Don Cayo: Puny loonie weakens Canada’s economy

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